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It looks as though it's just about game over for OCZ Technology Group (UNKNOWN: OCZ.DL  ) . While the company managed to become current with its SEC filings after an arduous, year-long wait, it's now apparent to even the most bullish OCZ investors that simply becoming current on long-overdue filings is not an upside driver. Indeed, with the books now open, it is now apparent that OCZ is unlikely to be able to continue as a going concern for too much longer.

This is a tragic fate, and one that has usually been avoided as desperate management teams eventually end up selling their companies to the highest bidder. However, given OCZ's condition, it is unlikely that a bidder will step in to buy the company at any meaningful premium to its current price, representing a market capitalization around $30.56 million. Indeed, while it may be tempting to speculate on shares here, keep in mind that the downside risk is still 100% of your investment.

What went so wrong for OCZ?
OCZ essentially tried to sell commodity solid state drives for which the bulk of the cost of goods sold was in the NAND flash. While OCZ had fairly little difficulty procuring NAND when the prices were depressed, Micron, Samsung, and others with NAND capacity have not only profited handsomely from the tightened supply industry wide, but have also made it exceptionally difficult for fabless players to make any real money without adding significant value on top of the NAND being sold.

OCZ's consumer products were largely undifferentiated. Sure, they may have been "faster" than the competition's drives, but given that all solid state drives are remarkably fast compared to their spinning platter counterparts, it really came down to cost. OCZ, believe it or not, with an inferior cost structure (due to having to pay the margins of the NAND producers), tried to undercut just about every player in the industry – including the very companies from which it was buying NAND.

This ultimately proved unsustainable, but was initially masked by rebate-driven shenanigans to mask the true cost of goods sold. Indeed, while the full extent of what was going on did not surface until after the year-long investigation and subsequent restatements, the idea was that OCZ was shoving much of the liabilities it faced due to the rebates into selling, general and administrative costs rather than cost of goods sold. In short, numbers that suggested that salespeople were working overtime to close deals turned out to be a rather devious ploy to mask the true unsustainability of the business.

The enterprise's last stand
Once founder and ex-CEO Ryan Petersen was shown the door, management tried to refocus the company on the enterprise flash market. Of course, this is a market dominated by major players such Fusion-io (UNKNOWN: FIO.DL  ) and countless others, but the gross profit margins are better since solutions are differentiated by relatively high-value software content. To that end, OCZ bought small, privately-held SANRAD for $15 million in OCZ stock to bolster its flash caching and virtualization software smarts. 

Its goal was, simply, to try to go head-to-head with Fusion-io. While Fusion-io has its own problems to deal with, its gross margin profile is still solidly in the 50%+ range and its cash situation is quite healthy, even if growth has slowed significantly and even if GAAP profitability remains elusive. 

No dice. While OCZ's management continued to claim that it was making progress here, the sad reality is that revenue has been falling like a brick (as the company moves out of the consumer SSD business), its net losses have continued to widen, and the cash keeps burning.

OCZ made some rather unfavorable deals in order to improve working capital from Hercules Technology Growth Capital (NYSE: HTGC  ) . The company quickly began burning through this, and now has but $48 million in current assets against $59 million in current liabilities. With $10 million in cash and about an $8 million per quarter cash burn rate, it is unlikely that OCZ survives to see this time next year as a publicly traded entity.

Foolish bottom line
Just stay far away from this stock. Don't try to be the hero and bet on a turnaround; contrarianism only works when you've got a good enough case to bet against the crowd. If you own the stock, then there's not much that can be done for you at this point; use your best judgment.

If you're fortunate enough to not be long the stock, continue to stay on the sidelines. There's much better risk/reward profiles out there than a failing, nearly bankrupt commodity flash storage drive player – guaranteed. 

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Read/Post Comments (10) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 06, 2013, at 4:59 PM, graciefan1 wrote:

    Do you know how many times MF members said stay away from nearly bankrupt companies. One comes to mind ALU

    If I stayed away at 90 cents I would have missed the huge turnaround

    Same with RAD

    Just say it's a high risk stock dont tell people to stay away or buy it

  • Report this Comment On November 06, 2013, at 5:23 PM, TMFAeassa wrote:

    No, I'm pretty sure I meant what I said. Thanks for commenting!

  • Report this Comment On November 06, 2013, at 5:35 PM, sparcusa wrote:

    Ashraf, you're at it again under a different banner! For those of you who don't know this guy, he was touting OCZ and wrote several favorable articles at SeekingAlpha. He has no qualifications to advise anyone, zero. He has called this stock wrong on multiple occasions and has no business giving anyone any advice. Check his record, its easy to verify. You've been warned.....

  • Report this Comment On November 06, 2013, at 6:12 PM, spirts wrote:

    Shouldn't you be on Seeking Alpha trashing?

  • Report this Comment On November 06, 2013, at 6:21 PM, graciefan1 wrote:

    I am sure you meant it but you should not say it

    You are welcome for the 1 penny reply

  • Report this Comment On November 06, 2013, at 6:44 PM, TMFAeassa wrote:


    I am not paid per page view, but I appreciate the sentiment nonetheless. Thank you for commenting!

  • Report this Comment On November 06, 2013, at 6:45 PM, TMFAeassa wrote:


    I publish my works on both and Seeking Alpha, both truly fine venues for financial writers. I hope you read my articles both here and over there. I appreciate the acknowledgement that you enjoy my work over there, too.

    Thanks for commenting!

  • Report this Comment On November 06, 2013, at 6:46 PM, TMFAeassa wrote:


    I'm sorry you feel that way, but I do believe that many readers enjoy my writings. That being said, any constructive criticism on this particular piece would be greatly appreciated.

    Thanks for commenting!

  • Report this Comment On November 06, 2013, at 7:35 PM, dangsd wrote:

    I have been in this stock for a long time and i know you try to write for it and FIO...I guess my comments for you aeassa would be to write your opinion and call it just that. I think the reason why people mostly criticize you and your articles is primarily in your confrontational and mostly controversial the one today "Stay away from OCZ"...Try this...write an article as an opinion column, let the readers develop their own opinion based on your article and findings of factual information. Summarize on your opinion, then be done. You may then actually have some positive comments and people may then eventually enjoy reading your articles. Just sayin... give it a shot, you can thank me later.

  • Report this Comment On November 06, 2013, at 8:10 PM, graciefan1 wrote:

    I agree with dangsd 100%

    I remember MF/SA members yelling stay away from SIRI when it was at 5 cents and RAD at 30 cents

    Both stocks are up 1000's of percentages and avoided BK. Those writers at that time made very compelling arguments why we should not buy those stocks. They have egg on their faces now!

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